3 questions (and 1 prediction) about Etsy’s IPO

Tuesday, Etsy announced it was going on a roadshow, starting Wednesday. In other words, it will go around to major institutional investors and start discussing its initial public offering. This process will determine the final price for Etsy’s shares at IPO.
If all follows the normal course, the roadshow should last a couple weeks. Very shortly after it ends, Etsy shares should go on sale on the NASDAQ. It would not be unreasonable to look for shares to go on sale within three weeks.

What does this mean for you? 

If you’re itchy to get in on it, the shares should sell at a price of $14-$16 once they start trading, according to a press release from Etsy. The company has set aside 5 percent of the shares in this IPO for the general public. A lot of times, the “public” side of an initial public offering is pretty thin, but you’re going to have a chance at these shares, at the IPO price. Not a huge chance, but a chance.
That said, if the price goes up quickly and institutional investors want to secure a quick return, shares will go on the market and regular trading will begin. It’s anyone’s guess how quickly that price will stabilize. Facebook stock dove shortly after its IPO and stayed down for a good year before it began to rise. Since then, it has remained well above its IPO price.
Etsy may be different, though. It’s margins are slim, but no one is confused about how it makes money.

How many shares is Etsy selling? 

A total of 16,666,666 shares are being sold. However, the underwriters have reserved what’s called a greenshoe option of an extra 2.49 million shares, known to the SEC as an over-allotment option, in case demand for the offering is exceptionally strong. Dig into it here.
The fact that a greenshoe is in play is nothing remarkable. After all, insuring stability is why a company brings in financial underwriters to run these things. However, if the greenshoe option is used, that means that there is some chance that there will be more shares on the street than 16.6 million. Considering the level of buzz around this offering, it’s probably a fairly good chance.

Should you buy Etsy stock?

¯\_(ツ)_/¯
A TechCrunch guest columnist took a deep dive into Etsy’s S1, the statement Etsy made to the SEC about its business and why it’s pursuing becoming publicly traded. Some takeaways:

• Network effects. Etsy’s revenues didn’t grow much last year despite a marketing push; however, historically, its revenue-to-marketing spend ratio far better than its peers.
• Mutual benefit. The numbers show that the sellers who last end up making a respectable amount of money, which makes a compelling case. “And as power sellers become smarter and empowered by better tools, I expect their average earnings to continue increasing. This is one of the most fundamental signs of Etsy’s strength – the ability for its sellers to earn a living,” he writes.
• Customer acquisition costs could get worrisome. Etsy has two customers it needs to acquire: buyers and sellers. Unlike a company like GrubHub, even a loyal buyer won’t buy that often. Etsy is fine now, but these costs will rise and the results of its marketing so far have not been exceptional.
• Etsy needs more “power sellers” to grow. Etsy’s base revenue from transaction costs is a thin margin. Most of its revenue growth is in selling services to its stronger sellers. To grow this revenue stream, it needs more power sellers. Are there more great craft ideas out there? Who knows.
• The big omission. Skip to the part labelled “Isn’t crafting trendy?” While it might sound like anti-hipster haterade, the writer makes a really important point. Why isn’t Etsy hyping the potential size of its market and how it has barely scratched the surface here? That’s not in the S1. Why not?
• Etsy would be tough to disrupt. No one is likely to steal Etsy’s spot at the top of the craft marketplace kingdom, because no one will dare try to undercut them on transaction price. That said, they can only hold onto that low transactional price at scale.

We recently covered Etsy’s pending decision to remain a B Corporation or not.

Our bet

Here’s our prediction following the Etsy IPO: New startups and new funds arrive in Brooklyn.
Look for some Etsy staff flush with IPO money (be it liquid cash or value they can borrow against) to come out of the company and launch their own businesses. Don’t be surprised if they turn out to be businesses that actually strengthen Etsy in some way. After all, sitting inside a company running a market this large, it’s inevitable that some of the staff have ideas about things that could make life easier for sellers, but aren’t a good fit for Etsy to do in house.
Also look for some higher-ups who cash out in the IPO or sometime after to start their own venture funds. Some folks that built Etsy probably have opinions about what makes a company work, and they may want to express that opinion financially.
In other words, whatever happens to Etsy’s price in the market once it’s a public company, it’s hard to see a scenario where this development doesn’t give us a lot more to write about.